NEW YORK -- Two former Bear Stearns portfolio managers were charged Thursday with misleading investors about the perilous state of hedge funds that later tanked, losing more than $1 billion and fueling the subprime mortgage collapse that contributed to the investment firm's unprecedented demise, authorities said.

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Ralph Cioffi Jr. and Matthew Tannin were arraigned on conspiracy and securities and wire fraud charges in Brooklyn federal court in a case based heavily on e-mails the two had sent each other suggesting they were acutely aware of the poor outlook for the funds.

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However, investigators charged that the pair publicly assured investors that two hedge fund were in solid financial shape just before they lost more than $1.5 billion in value.

"The defendants lied about the funds' condition, including their prospects, liquidity and exposure to the sub-prime market," said United States Attorney Benton Campbell, United States Attorney for the Eastern District of New York. "They lied in the futile hope that the funds would turn around and their income and reputation would remain intact."

According to the indictment, Cioffi and Tannin "agreed to make misrepresentations" and "omitted material facts in communications with investors." The indictment cites internal e-mail communications between the two managers suggesting a grave financial situation even though they later would offer reassurances to investors. In March 2007, Tannin allegedly boasted "believe it or not - I've been able to convince people to add more money ..."

Both men pleaded not guilty Thursday afternoon.

Cioffi was released on $4 million bond, secured in part by a Tenafly, N.J. home and a vacation home in Naples, Fla.

Tannin was released on $1.5 million bond secured by a Manhattan apartment.

The collapse of the two hedge funds was among the first signs Bear Stearns was in serious trouble. The Federal Reserve stepped in to keep the crumbling firm from bankruptcy, but it was taken over by JP Morgan Chase.

Prosecutors said Cioffi was charged with insider trader because while busy reassuring investors, he secretly transferred $2 million of his own money out of one of the risky funds called the "Enhanced Fund."

Investigators said the two even misled other Bear Stearns asset managers. "On April 24, 2007, Cioffi, Tannin and others told senior BSAM personnel that they were confident that the funds were in good shape and would continue to be successful," the indictment states.

"It's about the defendants prostituting their client trust in order to salvage their personal wealth at the expense of those seeking sound advice and a reasonable rate of return in what they were led to believe was a reasonably safe investment," said Mark Mershon, assistant director in charge of the FBI, New York field division.

The Securities & Exchange Commission and the FBI continue to examine the actions of other investment bankers at other firms to see if any intentionally misled investors over the value of mortgage backed securities. Hundreds of billions of dollars have been lost amid the sub mortgage crisis.